1. Interest Rate Parity Assume that Interest Rate Parity holds. The spot rate for the Euro is $1.20 and the one year

1. Interest Rate Parity

Assume that Interest Rate Parity holds. The spot rate for the Euro is $1.20 and the one year forward rate is $1.23. The annual rate of interest in Germany on annual deposits is 2.439%. What is the annual rate of interest on deposits in the United States? Also, please do not approximate.

Step by step, show how you calculate your answer.

2. Covered Interest Arbitrage

Assume the following information:

Spot rate today of Swiss franc	= $.60
1-year forward rate as of today for Swiss franc	= $.63
Expected spot rate 1 year from now	= $.64
Rate on 1 year deposits denominated in Swiss francs	= 7%
Rate on 1 year deposits denominated in U.S. dollars	= 9%

From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ______%.

Show how you calculate your answer.

3. Cross-exchange Rate

Assume the US Dollar is equal to 1.05 Canadian dollars and the euro is equal to $1.45. What is the value of one euro in Canadian dollars?

Show how you calculate your answer.

4. Locational Arbitrage

Assume the following bid and ask rates of thepound sterlingfor two banks as shown below:

	Quoted Bid Rate	Quoted Ask Rate
Bank C	$1.61	$1.63
Bank D	$1.58	$1.60

Observe that locational arbitrage occurs. What is the impact on the quotes above?

5. Triangular Arbitrage

National Bank quotes the following for the British pound and the New Zealand dollar:

	Bid	Ask
Value of a British pound (£) in $	$1.621	$1.625
Value of a New Zealand dollar (NZ$) in $	$.551	$.553
Value of a British pound in New Zealand dollars	NZ$2.951	NZ$2.960

Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?

Step by step, show how you calculate your answer.

6. Purchasing Power Parity

The following regression was conducted for the inflation rate information and exchange rate of the British pound:

Regression results taken directly from MS Excel indicate the following:

	Coefficient Estimate	Standard Error	T stat
Intercept	0.66	0.11	6.00
Inflation Differential	0.45	0.30	1.50

Suppose that the critical t value is 1.7 or -1.7.

Do you have any evidence inconsistent with the Purchasing Power Parity theory? If there is evidence inconsistent with the Purchasing Power Parity theory, please show all evidence inconsistent with the Purchasing Power Parity theory.

Show all calculations to justify your answers to the questions above.

7. Hedging Payables with Options

A U.S. corporation has purchased currency call options to hedge a 100,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.45, what is the total amount paid by the corporation if it acts rationally?

Show how you calculate your answer.

8. Currency Option Hedge

Quasik Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. Quasik plans to implement a currency option hedge. Assuming that the spot rate in 90 days is $.71, what is the net amount received from the currency option hedge?

Show how you calculate your answer

9. International Fisher Effect

Nominal annual interest rates in Cyprus are 5%. The spot rate for the Cyprus pound (CYP) is $1.50 and the Cyprus pound is expected to adjust to a future spot rate (one year from today) of $1.53. According to the international Fisher effect ( IFE ), what is the nominal interest rate in the United States? Do not approximate.

Show how you calculate your answer